Why the 60/40 Portfolio Needs Major Overhaul as Bond Turmoil Looms

The 60/40 portfolio of stocks and bonds, the benchmark allocation for decades, may not survive the next decade amid a seismic shift in the bond markets, according to several investors and investment advisors, as outlined by Barron’s. The classic asset allocation that has been historically recommended for retirement savers, “may have thrived in the 2000s and 2010s but won’t survive the 2020s,” according to Bank of America Merrill Lynch’ Jared Woodard and Michael Hartnett. 

Dividend Stocks, Junk Bonds, High-Quality Munis

According to a recent report, BofA analysts believe that trends will force investors to replace bonds, and even stocks, with other assets, such as cyclical dividend stocks, junk bonds, and high-quality munis. 

A major reason for this shift is that the 60/40 portfolio will no longer be able to get its historic returns due to volatility in the bond market and negative interest rates. Recently, a rally in the global fixed income market has sent U.S. bond yields to near 10-year lows. In Japan and Europe, bond yields are now below zero, per Barron’s. This has led to a whopping $17 trillion globally of negative yielding debt. 

Over the last six months, coinciding with a sharp decline in yields, long-term treasures have jumped 28%. Moving forward, rates could continue to fall as the Fed cuts rates, and high U.S. yields compared to the rest of the world drive yields lower, per BofA. 

What’s Next? 

Woodard and Hartnett recommend that investors take a look at “bombed out” cyclical sectors with cheap valuations, such as industrials, financials and materials. They also point to short-term junk bonds and floating-rate notes, as well as high-quality munis as a substitute for Treasuries and investment-grade corporate bonds. 

That said, cyclical stocks, junk bonds and floating-rate notes are all “riskier” assets, which may be less attractive for investors bracing themselves for the next economic downturn. If a risk-off climate does ensue, investors will likely flock to safe havens like Treasuries.